2017 (3) TMI 1713 - AT - Income Tax

Disallowance of interest expenses in relation to funds borrowed for various purposes including loan/advances given incidentally from which the appellant is earning interest income - Held that - CIT (A) has given a very categorical finding that this interest expenditure has no co-relation with the earning of ₹ 48 lakhs of interest income from ICD, because the funds advanced for ICD was out of the interest free fund of ₹ 11.25 crores received from the associate company. Only contention as raised by that, this interest expenditure should be capitalized, because it pertains to the ongoing project. It is purely a new plea/ground, which has been taken for the first time at this stage, but at the same time it goes to the root of the issue involved because, whence, this interest expenditure is not attributable to income from other sources , then it indicates that the same may have been for the purpose of construction business/ongoing project. Being a core issue which goes to the determination of correct tax liability of the assessee, we therefore deem fit to admit the additional ground. Since this aspect has neither been contented by the assessee before the AO nor has been examined by the AO, therefore, in the interest of justice, we remit back the matter to the file of the AO, who shall examine the utilization of the borrowed fund for the purpose of business and the nexus of interest expenditure which has been incurred on such borrowed funds. - Appeal of the assessee is partly allowed for statistical purposes.

Issues:
1. Disallowance of business expenses claimed by the assessee.
2. Disallowance of interest expenses in relation to funds borrowed.
3. Direction for disallowance of interest cost exceeding 12% of borrowed fund.
4. Capitalization of interest expense in 'Work in progress' of the project.

Analysis:

Issue 1: Disallowance of Business Expenses:
The appellant contested the disallowance of expenses amounting to ?67,04,063 out of total expenses claimed of ?69,77,956, arguing that the expenses should be allowed as the appellant was engaged in business activities. The AO disallowed the expenses as the appellant had not commenced business operations during the year. The CIT(A) partly allowed some expenses as revenue expenditure and directed the rest to be capitalized. The Tribunal found that the expenses were related to a project under construction and remitted the matter back to the AO for further examination.

Issue 2: Disallowance of Interest Expenses:
The AO disallowed interest expenses claimed by the appellant, stating that they were not directly attributable to the earning of interest income. The CIT(A) upheld the AO's decision, noting discrepancies in interest rates and fund utilization. The Tribunal admitted the additional ground raised by the appellant regarding the capitalization of interest expenses, remitting the matter back to the AO for verification of the nexus between interest expenditure and project utilization.

Issue 3: Disallowance of Interest Cost Exceeding 12%:
The CIT(A) directed the disallowance of interest cost exceeding 12% of the borrowed fund without quantifying the disallowance figure. The Tribunal set aside this issue to the AO for examination based on the utilization of borrowed funds for business purposes and the nexus of interest expenditure incurred on such funds.

Issue 4: Capitalization of Interest Expense in 'Work in Progress':
The appellant sought the capitalization of interest expenses in 'Work in progress' of the project, contending that it was for the ongoing project. The Tribunal admitted this new ground and remitted the matter back to the AO for further examination to determine the correct tax liability of the assessee.

In conclusion, the Tribunal partly allowed the appeal for statistical purposes, remitting certain issues back to the AO for detailed examination and verification in light of the directions provided.

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